4 Reasons Entrepreneurs Don't Scale Their Start-Ups and Fail
If it is the first time you are trying to run a larger organization, you'll likely make some mistakes. From targeting the wrong market to ignoring the competition, some common mistakes hinder an entrepreneur's growth.
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Many people are ditching the 5-to-9 to be their own boss. Unfortunately, with rare exceptions like Mark Zuckerberg, Bill Gates and Elon Musk, most entrepreneurs who venture into business fail by year five. Almost 50% of start-ups survive five years or longer, and only 33% survive by year 10.
Most entrepreneurs fail to scale, meaning they do not adapt their leadership style as their business grows. All this may sound awfully discouraging. Yet, entrepreneurs run out of gas because they make one or more common mistakes: targeting the wrong market, choosing a bad location, not having enough capital and ignoring the competition. These are some of the biggest mistakes entrepreneurs should be aware of to improve their chances of success.
1. Targeting the wrong market
Advertising in the wrong market is a sure path to nowhere for any business, regardless of concept and product. Common segmentation mistakes to avoid are going too broad or too narrow, targeting non-buyers and failing to account for demographic and psychographic factors such as gender, age, interests, hobbies and shopping behaviors.
Even the best business ideas are doomed to fail if a market disappears because of natural disasters, political upheaval, tightening regulations or other factors beyond control. While it is hard to predict natural disasters or armed conflicts, start-ups must determine whether the market is big enough to accommodate multiple players and support them and their competitors.
2. Choosing a bad location
Location is crucial for success, especially for businesses that require foot traffic. A bad location means less visibility and walk-in traffic, and fewer sales. When assessing the retail potential of different sites, important factors to consider are receptiveness to a new business, parking, traffic and accessibility and where customers are. But even when a retail location does not witness high footfall, there are some tactics to attract customers, like maximizing retail signage, placing signs in busy locations, handing out flyers, participating in local events, and getting involved in community organizations.
3. Not having enough capital
One of the most common reasons start-ups fail is that they run out of cash. There are several reasons why cash flow problems occur, including lack of budget, unrealistic estimates about start-up costs, high overhead costs, low-profit margins and growing too quickly.
Not having proper cash flow management and budget is a recipe for disaster. In the simplest terms, a cash flow budget is an estimate of cash leaving (outflows) and coming into a business (inflows). Creating a budget allows businesses to estimate the timing of receipts and expenses at any time.
Underestimating start-up costs is also a common mistake entrepreneurs make. A study by a former London-based business service Geniac showed that new businesses invest about $29,700 on average to cover legal and HR services, company formation, accountancy and other administration costs. Yet, start-ups underestimate costs by $3,300 on average. Common expenses that new businesses are likely to underestimate include taxes and insurance coverage, human resources, maintenance and repairs and product development.
Lastly, start-ups often make the mistake of expecting profitability too soon. Most entrepreneurs gain profits between the third and fourth year of running their own businesses. How long it takes to be profitable depends on the business type and start-up costs. Start-ups developing a new product, for example, take three or more years to become profitable. This is because there are costs for adding an expert or partner in addition to accounting, marketing and other expenses.
Many business owners don't know what they are doing, at least for a while. Learning new things often means attending partner conferences, webinars, seminars, training and certification classes. When a product-based start-up becomes profitable also depends on what raw materials or components they use, the resources they lack and have access to, and the manufacturing method, prototyping and design they use.
4. Ignoring the competition
This may come as a surprise, but there can be good reasons to ignore the competition. Identifying and researching competitors can take a lot of time and effort, especially when there are too many of them. As most start-ups have more limited resources, focusing on customers and what they actually want might make more sense. At the same time, businesses that ignore the competition completely miss opportunities to gain valuable insights about customers and might find themselves losing ground to competitors. Following what others are doing does not mean obsessing about them; instead, it means being aware.
Many businesses fail because entrepreneurs lack the knowledge, skills and operational capabilities to scale their start-ups. Entrepreneurs who do scale are open to learning, improving and adapting their leadership selves. They grow into inspirational and influential leaders because they are willing to confront their shortcomings, seek input and feedback from others and shift their outlook and mindset. Such entrepreneurs are ultimately successful in their endeavors as they embrace the opportunities they have to grow as business owners and people.